Is ICO a Ponzi Scheme?

This article will explain to you how to identify a financial pyramid, how it differs from an ICO and how to select a promising project for investment with minimal risks.

Read time: 6 min

cryptoassetsrank.com Published on Sep 13, 2018

This article will explain to you how to identify a financial pyramid, how it differs from an ICO and how to select a promising project for investment with minimal risks.

What is a financial pyramid?

This is a multi-level money-making scheme where the money received from the new investors is distributed among those who invested earlier.

The functioning principle: the creator of the pyramid scheme finds investors and promises 50-100% profit to them within a short period of time. To do that, they need to invite other investors, from whose investments those on the top of the pyramid will receive profit.

Characteristic features:

You need to invest a large sum of money.

Promises to fatten the profits several-fold within a short period of time.

In order to withdraw the money, you need to invite your acquaintances to invest.

The project claims to be a “know-how” and has non-standard work schemes.

For example: a Ponzi Scheme.

This is making money from arbitrage, i.e. reselling the goods to other countries. Charles Ponzi attracted the investors by promising them a 50% profit within a month and a half. The investors did not investigate the source of income and invested the money that was distributed among the earlier investors.

The Ponzi scheme failed because the founder of the financial pyramid had no money to pay to the later investors, since the money was distributed only among the earlier investors on the top of the pyramid.

What is ICO?

ICO is initial coin offering.

The functioning principle: the users invest into a project and receive tokens for it. You can exchange the tokens, pay with them for the services provided on the project platform and trade at exchanges. The sales of asset tokens are regulated by the U.S. Securities and Exchange Commission (SEC). It equated this type of tokens to the securities.

As opposed to a financial pyramid, in an ICO:

It is you who determines the amount of money to invest.

Nobody promises quick profits and guarantees a breakeven result. All depends on the project quality and demand. There are risks and they are not concealed.

You do not need to attract other investors in order to withdraw the money.

The money is not distributed among other investors.

There are projects based on a pyramid scheme. Below you will find a checklist using which you can distinguish between a promising project and a fraud.

Characteristics of a promising ICO

Competences of the team. On the website there should be information about each specialist with a detailed professional background and contact details. If the team has little experience, there are fewer chances for success. Those specialists who have worked in the sphere of blockchain or famous companies have more credibility. For example, Alex Bessonov, the founder of BitClave, worked in LG Electronics, Ebay and Microsoft.

Demand for the product. The project has the future if the market needs it and if the competition is low.

For example: the Jobber company wanted to gain $50 000 from ICO in order to create a freelance platform. Having collected $24 000, the project failed because such a product already exists and the market does not need another equivalent.

Detailed roadmap. It provides a plan for expenditure and a forecast of the token price growth. If the roadmap has no specifics, it is a sign of either a weak team or a fraud.

For example: the plans of the NATCORP company after initial coin offering are to develop the service and to install ATMs. When this will happen is a mystery.

Escrow. The company can be trusted if it uses an escrow service that secures the investors’ money until the specified conditions are fulfilled. If the project does not collect the minimum amount needed for an ICO, the money is returned to the investors.

Detailed and comprehensible white paper. The white paper describes the gist of the project.

The main objectives are to describe the work principles of the project, to prove that the project is viable and to show competitive advantages. If there is no such description, the startup is unreliable.

Publicity and project reviews. Communication of the project founders with the investors on social media and forums allows you to learn the details about the project and the investments. If the project founders are hiding and not responding to the investors’ questions, they are most likely scammers and afraid of answering tough questions.

Clean website. Before selecting a project, check its website via Who.is. Find out the date and place of domain registration, the owner’s name, the content history on the website.

For example: the Ebitz project was of interest to the users because its founders promised that their cryptocurrency would replace Zcash, the founders would receive no reward and the currency itself would have a changed algorithm in PoS.

After the initial coin offering, negative reviews arrived: it turned out that the domain ebitz.org used the servers of the platform that a couple of years before had been declared a fraud.

Positive assessment by the rating agencies. The agencies assess the risks and the viability of the projects by agiotage, risk level and investment potential. However, even the experts can make mistakes, that is why first of all analyze the information yourself and then check with the data provided by the agencies.

ICO ≠ financial pyramid, but some projects can be based on a pyramid scheme. Use this checklist not to lose your money.

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